CFA Level I · CFA Level I Exam · The Firm and Market Structures
In the short run, a perfectly competitive firm's supply curve is best described as the portion of its:
The short-run supply curve is the part of the marginal cost curve that lies above average variable cost. The firm sets price equal to marginal cost as long as price covers variable costs. Below that point it shuts down, since it would lose more by operating than by closing.
- Aaverage total cost curve above marginal cost
- Bmarginal cost curve above average variable costCorrect
- Cmarginal cost curve above average total cost only
Explanation
A firm produces where P = MC provided price covers average variable cost. Below minimum AVC it shuts down and produces zero. So the short-run supply curve is the marginal cost curve above minimum average variable cost. Requiring price to cover ATC applies to the long run, not the short run.
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